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February 13, 2001

Greenspan Sees Major Economic Slowdown in 2001
By Reuters

Greenspan Wraps Bad News in a Warm 'n' Fuzzy Outlook ... Weiss comments

WASHINGTON - Federal Reserve Chairman Alan Greenspan said Tuesday the U.S. economy faces a sharp slowdown in the coming year as businesses work off unsold inventories and consumers appear less confident about the future.

In testimony to the Senate Banking Committee, he left the door open for more interest rate cuts amid an outlook where "downside risks predominate."

Projecting a major economic slowdown in 2001, he said the transition from super-charged growth rates to a weaker economy might not be a seamless one.

"In addition to the possibility of a break in confidence, we don't know how far the adjustment of the stocks of consumer durables and business capital equipment has come," the Fed chief said. But he said the economy could be headed for a pickup once inventories were brought into line with sales.

Greenspan said the accelerated process of business reaction to economic downshifting had forced the Fed to act more aggressively to cut interest than it has in past slowdowns. He also noted that inflation has remained low and that the Fed's two rapid-fire half-percentage point interest rate cuts in January had not put the low-inflation outlook at risk.

The sole purpose of Fed Chair Alan Greenspan's "state of the economy" address is to give Congress and Wall Street the warm and fuzzies. The underlying message is "Don't worry. I have it all under control. The economy isn't heading into a recession, there's merely an inventory surplus, my friends in Congress. But that doesn't mean that we're going to stop cutting rates, my friends on Wall Street."

But if you listen closely, there were several ifs, ands, or buts that could throw Greenspan's rosy scenario into the murky deep.

First, any turnaround depends on consumers changing their attitude about the economy. But with all the news of layoffs, sustained high energy prices, and a loss of confidence in the stock market, there isn't much chance of consumers embarking on mass shopping sprees.

Second, Greenspan is still putting all of his eggs in the productivity basket despite the fact that productivity growth has dropped significantly and business investment in efficiency-enhancing technologies and equipment has stumbled.

Third, Greenspan's contention that inflation will remain under control even with more rate cuts is absurd. We've already seen an uptick in inflation -- core PPI increased more than expected last month, CPI sped up to a 2.6% year-over-year pace from 2.0% at the beginning of the year, and wage inflation continues to accelerate every month.

The number of factors that can push the economy into a deep recession are astounding. And even though Alan Greenspan testified that the economy is only experiencing temporary setbacks due to inventory build-ups and high energy costs that have weighed on consumers, he also laid out several scenarios as to why the economy won't pull out of the current downturn.

Congress is choosing to focus on Greenspan's rosy outlook and ignore his bad news. Let's hope America doesn't have to pay a high price for that decision.

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